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The city watchdog is under pressure from multi-party MPs to explain why it allows subprime lender Amigo to push forward a bailout that will cap compensation payments for nearly a million customers, while giving leaders the opportunity to earn £ 7million. as a long-term bonus.
Shadow City Minister Pat McFadden and Conservative-led Treasury Committee chief Mel Stride said the Financial Conduct Authority had questions to answer about how it regulated companies like Amigo and whether it fulfilled its obligation to protect. consumers.
The FCA – which has been responsible for regulating high-cost lenders since 2014 – has confirmed it will not intervene in the program, which is expected to be approved by a High Court judge on Tuesday. The proposal will then be submitted to borrowers for a vote.
McFadden warned that other high-cost lenders could profit from the FCA’s lack of action. “If Amigo is able to avoid repair payments through this mechanism, there is a risk that it will set a precedent for other companies in a similar position,” said McFadden. “And of course, people will be appalled if ordinary borrowers run out of currency while those at the top of the business receive large payments.”
The consumer credit division of home lender Provident Financial has already offered a deal similar to Amigo’s, and other high-cost lenders who struggle to keep up with claims may follow suit.
“There have been several recent examples where people have financially lost FCA-supervised businesses,” McFadden said. “The FCA needs to look at how it oversees businesses and determine if the right protections are in place for consumers and investors.”
Concerns over Amigo will add to growing frustrations over the FCA’s inability to prevent further crises in the city, including the collapse of Neil Woodford’s investment fund and London’s £ 236million implosion Capital & Finance, which led the regulator to be reprimanded by a former judge of the court of appeal. for not having acted in time to protect savers.
Typically, borrowers who have poorly sold loans that they cannot afford are offered a 100% refund of the interest paid, plus an additional interest rate on those fees. Amigo’s loans are worth up to £ 10,000, are repaid over a number of years and carry an annual rate of around 49.9%, meaning clients can have large payments.
However, Amigo has struggled to cope with the flood of successful claims filed with the Financial Ombudsman Service (FOS), and therefore comes up with a system that would likely cap compensation between 10% and 23% of what otherwise would have been owed. , if not less. Amigo also plans to reduce the outstanding balances of applicants who still have not paid off their loans.
Customers who borrowed loans before December 21, 2020 will not be able to file claims through the FOS if the program is approved.
Meanwhile, five of Amigo’s executives have stock options through their long-term bonus program that could be worth £ 7.3million in five years if the company’s stock price climbs, as expected, thanks to the agreement.
The company argues that it could collapse into administration if the system is blocked.
Stride said FCA would face tough questions from MPs if the project came to fruition. “Any situation where directors could receive bonuses based on a reduction in fair and reasonable compensation to consumers would clearly be of significant concern,” Stride said.
“I have no doubt that the Treasury Committee will have questions about this for the FCA on its next visit,” he added.
The regulator told Amigo it does not support the program and is concerned about how Amigo plans to assess allegations of mis-selling. He also opposes Amigo’s plans to pay much less to borrowers who might have received larger payments by complaining to the FOS.
However, an FCA spokesperson said the decision to approve the program rests with the court and borrowers, rather than the regulator. The FCA said it was working “extensively” with companies ahead of court hearings “to try and get the fairest outcome for consumers” and that it would ensure the system worked as intended if it worked. was approved.
“We appreciate in this case that people feel they are entitled to a full remedy. However, the alternative to any arrangement system may be insolvency, which risks causing consumers to receive very little or nothing, which we must be very careful about, ”added the spokesperson for the FCA.
But Amigo chief executive Gary Jennison stressed that the program was the “only real option” for clients hoping to receive cash compensation, and Amigo’s potential collapse would only drive clients to lenders. less reputable.
He said the new management team was focused on turning Amigo around and solving “problems of the past” by ensuring that 15% of profits were spent on the program over the next four years, in addition to ‘a compensation pot worth up to £ 35million.
“Since it is in their best interest and the real alternative is insolvency, we strongly encourage our 700,000 former clients and 300,000 current clients to vote for their money and support the program,” Jennison added.
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